Yesterday saw Jeremy Martin, CEO of Horizonte Minerals (LSE:HMZ) update investors on progress at the firm just hours after delivering a well-received resource estimate for its Vermelho nickel/cobalt project in Brazil. As well as discussing the news at Vermelho, which led Horizonte’s shares to rise by 4.5pc on the day, Martin updated investors on the well-advanced feasibility study at the firm’s large Araguaia nickel project. He argued that Horizonte’s vast resource base and robust macro backdrop leave it looking highly under-valued at its current £63m market cap. Here, ValueTheMarkets.com summarises the main points of the afternoon’s conference call:

Vermelho resource

The big news of the day came from Horizonte’s 100pc-owned Vermelho nickel-cobalt project in Brazil, which it purchased for $2m last December from mining giant Vale SA. Before the call, Horizonte revealed that Vermelho contained nickel-cobalt mineral resources in the measured and indicated category of 167.8MM tonnes, graded 1.01pc nickel and 0.06pc cobalt. At these grades, Vermelho includes 1.68MM tonnes of nickel and 94,000 tonnes of cobalt, positioning it as one of the most significant, highest grade undeveloped laterite nickel-cobalt resources globally.

Horizonte’s shares rose by as much as 9pc in morning trading on the back of the news before falling back throughout the day slightly to close up 4.5pc, or 0.2p, to 4.6p. In the call, Martin told investors that Horizonte would test if Vermelho can produce nickel and cobalt sulphate for the electric vehicle (EV) battery market later this year. If it can, then the resource will be able to provide nickel to both the EV battery and stainless-steel markets, a unique position for a mine of its type.

‘The next phase of work will be testing if we can take the mixed hydroxide products and upgrade them to produce nickel and cobalt sulphate of a suitable grade for use in the EV battery space. If we are successful, that will be a huge step as it will give us the flexibility to serve the two largest sources of nickel demand,’ said Martin.

He added that Horizonte will also carry out a preliminary economic assessment on Vermelho later this year and will advance permitting to take the project into pre-feasibility in 2019:

‘Previous owner Vale had used a much lower nickel cut off and were looking at a large, low-grade operation. We wanted to have a lower tonnage, high-grade operation and maximise those economic returns. We will carry out an economic study looking at a smaller throughput operation than Vale, with the aim of securing a much lower capital cost. We don’t have the same balance sheet capabilities as Vale. We would aim to produce around 20,000 tonnes a year of nickel 1000 tonnes a year of cobalt.’

Araguaia progress

Martin also updated investors on progress at Horizonte’s 100pc-owned, Tier 1 ferro-nickel project Araguaia, which is considered to be one of the most substantial undeveloped saprolite resources globally. A pre-feasibility study carried out in 2016 estimated that the project will generate over $1bn in free cash flow over a 28-year life of mine, based on conservative nickel prices of $12,000/t.

Horizonte is currently in the advanced stages of a fully-funded feasibility study for the project, which is expected to hit the market in Q2 or Q3 this year. Martin said Horizonte has taken time to complete the study accurately and has also been advancing permitting to get Araguaia ready for construction in 2019 and first metal production by Q1 2021:

‘We are working on the feasibility study, optimising the plant layout and ensuring we are delivering a study that is of the highest quality possible. This careful approach ensures we are minimising capital costs, placing the project at the lower end of the cost curve to give us the maximum economic returns.’

He added that Horizonte has received plenty of interest from third parties around financing Araguaia’s construction. He will look to advance these discussions once all the necessary preliminary work has completed:

‘The main catalyst for building up the construction financing package is the delivery of the feasibility study. That is what all the potential debt providers and equity investors want to see. We have received interest from offtakers, private equity groups and some of the actual stainless-steel producers. We are at the early stage on this, but the aim is to start securing construction finance once we have feasibility. The further down the line you leave offtake agreements, the better deal you tend to get because you have further de-risked your project.’

Fairly valued?

Finally, Martin pointed out that that Horizonte’s current £63m market cap is undervalued. Aside from the potential of Araguaia and Veremelio, he highlighted the firm’s £9.5m cash balance- which funds its work all the way into next year- and its strong institutional investor base.

‘Araguaia is currently underpinning our market cap. If we take the project as a stand-alone metric based on our current market cap, then there should be many multiples that we can generate out of it. Furthermore, we are not getting anywhere near full value for Vermelho today. If we look at the peer group for nickel/cobalt companies, the average market cap is around £100-£150m. We should be able to create that sort of value over the next 12-18 months from Vermelho.’

Asked about whether a large seller has impeded Horizonte’s market cap over the last three-to-four months, Martin said it could be difficult to pin down this sort of activity:

‘We definitely had a seller around two months ago, and we placed a significant portion of that position. We regularly see our major shareholders, and they are all in with us for the medium-term. It is challenging to account for all stock at any individual point in time. As far as I am aware, we do not have a major seller in the market today, but that changes on a fund’s position or its view.

‘Regardless, Horizonte today has the right products, is ready to produce first metal in Q1 2021, and has a robust position in both the nickel and cobalt markets. Our timing and positioning are very well aligned, and we can create significant value over the next 12-24 months for the company. I think if we also see another uplift in Nickel that will become another catalyst for a driver for our shares given our strong fundamental value.’

Author: Daniel Flynn

Disclosure: The author of this piece owns shares in the company covered in this article.

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